ATO & Good record keeping for property investors

Good record keeping is essential for rental property investors…

If you made a New Year’s resolution for 2009 to keep good records for your rental property, it is one New Year’s Resolution you should keep! One of the ATO’s biggest concerns is that investors and business owners keep good records.

If you faced an audit, it would be no use to throw up your hands and smile at the ATO auditor while saying: “I’ve lost my records” or “I didn’t keep those papers.” A taxpayer who makes no attempt to keep records or who deliberately destroys records could face penalties.

Taxpayers who have simple tax returns without investments or business activities are expected to keep their tax records for only two years. But if you own property or have business interests, you have to keep all those taxation records for five years.

So what documents do you need to store? The answer is all supporting documents that prove the claims in your tax return. If your investment is in real estate, this documentation would include your bank statements, mortgage statements, estate agent’s statements of rental income and expenditure, leases, and copies of all your receipts for costs such as council rates, insurance, repairs, and new equipment. You would even keep a receipt for work done on the garden. In other words, all receipts. In short, if you claim it, you must keep it.

Legal documents are equally important to keep. Fortunately, very few people discard heavy legal documents. Legal documents evidencing ownership such as documents of title are essential when you need to prove ownership, or you need to show when you commenced or ceased to be an owner. For tax purposes, you need to keep both the contract for sale as well as documents of settlement.

Most people think it is the date of settlement when the property is transferred that represents the sale of the property. For tax purposes, though, it is not the date of settlement, but the contract date which is used to calculate capital gains. So you need to keep the contract as well as documents showing the settlement which provide evidence of the amount paid and a break down of the transfers and costs.

Naturally, all these documents need to be kept in a safe place. Storing information is not easy and the papers mount up. The more investments you own, the higher the pile of documentation grows, and filing and orderliness become important. It is also necessary to be able to find the relevant papers when you need them.

With space at a premium, many people, including myself, would like to reduce the mountains of paper by scanning all documentation and keeping everything neatly stored and filed on computer. This may solve the space problem but could create another difficulty if you have a computer crash or a virus. I would suggest that storage on computers would be great insurance should you lose your hard copies, but it is still necessary to store the original documentation.

Keeping accurate proof is increasingly important especially as the Tax Office is improving its capability of comparing rental property information within tax returns. They are using this to make comparisons between income from property and costs of rentals between different taxpayers with similar investments.

The ATO are also checking on property sales. They are doing this through significantly expanding data matching and comparing figures with Land Titles Offices, State Revenue Departments, Valuation Offices, and even commercial service providers enabling them to obtain information about property sales which may not have been disclosed by a taxpayer.

The Tax Office is keen to educate the public to keep records and to that end provide books showing how to record data. Practice statement 2005/2 outlines the tax officers’ practices when reviewing taxpayers’ records, and Section 228-25 of the Taxation Administration Act imposes a penalty of $2,200 if a taxpayer fails to keep records in the appropriate manner required by law.

So, for the smart property investor, it is wise to retain all relevant documents in the interest of being able to support all your property investment taxation claims and to give you added peace of mind.

Rosemarie Chad is a CPA, a registered tax agent and holds qualifications in accounting and business administration. She graduated from the University Of Technology Sydney (UTS) in with a Bachelor of Business majoring in accounting. She became a member of the Australian Institute of Export in 1983.

Since commencing Easy Tax, Rose has been providing accounting services for small and medium businesses across a range of industries including medical practitioners, builders, IT consultants, educational institutions, hotels and more. Rose also has developed specific experience and expertise in offering tax advice for property investors.

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